The worst trap a mortgage expert can fall into is thinking they’re shrewd enough to predict interest rates.
Yet, they do it because they:
- Think they’re smarter than the market
- Want media, readers or clients to think they’re smarter than the market
- Are completely delusional.
The most comedic rate commentators are the ones who couch their predictions in vagaries so people can’t pin them when they’re wrong.
Instead of saying “rates will go down,” for example, they’ll say something like “rates are overextended.”
What does that even mean? How overextended are they? When will they become un-overextended? Why are they overextended?
These “gurus” would have you believe that traders are misreading the fundamentals. Yet they, in all their banker, analyst or mortgage broker wisdom, can see through the noise and discern the path of rates—despite the infinite random economic events that could alter rate fundamentals overnight.
The beauty about saying rates are “overextended” is that the “expert’s” prediction can’t be readily discredited. Even if rates keep climbing, the expert’s excuse for being wrong is that the bond market is temporarily “oversold” and must eventually retrace.
Heros Get Their Heads Handed to Them
In 1972 inflation dipped below 3%, a welcomed break from the hefty price increases of the prior five years. The Federal Reserve, as reputable an expert as any, predicted that “inflation should gradually dissipate over a period of four or five years.”
A mortgagor taking cues from the Fed back then might have very well chosen a short-term fixed or variable on that prediction. After all, the Fed has as much economic data and foresight as anyone.
That would have been a mistake.
One year later, inflation hit double digits and rates skyrocketed five points.
You may hear people like us talk about structural disinflation and mega trends that should keep inflation (and rates) below current historical averages over the long run. But always remember that at any given time, markets can do what none of us ever expected.
Inflation from an overstimulated economy and spiralling federal debt (like what might be brewing south of the border) can put dread in the hearts of seasoned investors, and when seasoned investors get scared they sell bonds…fast. That drives up rates quicker than a pack of dogs drives a cat up a tree.
This by no means suggests that rates could imminently soar. It’s simply a reminder that if you’re vulnerable to higher interest costs, don’t bite on the lowest variable rates just because you see “Prime – 1.00%!” in newspaper headlines…or because some mortgage broker was quoted saying rates are overextended.